Author: Untung Wibowo

As a growing country infrastructure and building construction become a major part in Indonesia development. The said activities in Indonesia is regulated under Construction Service Law (Undang Undang Jasa Konstruksi/ “Law 2 of 2017”). The law regulate that the activities could only be done by an individual or company that have a construction business license.

In this article we will share brief information in relation with the registration of company and business license procedure for a construction company (for Local and Foreign Direct Investment/ “FDI”)

Land and Property Ownership (i.e. Building) in Indonesia is primary regulated by Law 5 of 1960 (Undang Undang Pokok Agraria/ “UUPA”). The law became a modern unifying law that regulates land and property ownership in Indonesia. During the pre-independence era,land and property ownership were regulated by Colonial Law, Native Custom Law, and some Islamic Laws.

The Native Custom Law contributed a horizontal separation principle to the Land Law which makes the ownership of Land and Building separate. Having said that, a land with property on it may be owned fully or partially.

Even though the separation of ownership is regulated by law, however, this subject is not commonly known even by the Indonesians. The lack of implementation of the regulation for the ownership of buildings may be the cause of this.

In this article, we will discuss types of ownership for land and property in Indonesia based on the UUPA.

Land Ownership​

UUPA regulates that land ownership is classified into 5 primary types as follows.

1. FreeholdTitle (Hak Milik/”HM”)

Time Period: No limit

Designation: Free as long as it does not conflict with urban planning

Holder: Only Indonesian Citizens (and some religious foundation)

Used as an Inheritance: Applicable

Used as a Collateral: Applicable.

2. Rights to Build (Hak Guna Bangunan/ “HGB”):

Time Period: Maximum 30 years and can be extended for maximum 20 years

Designation: For building;

Holder: Indonesian Citizens and Indonesian Legal Entities

Used as an Inheritance: Applicable (Indonesian Citizens)

Used as a Collateral: Applicable.

3. Right to Exploit (Hak Guna Usaha/ “HGU”):

Time Period: Maximum 35 years and can be extended for maximum 25 years

Designation: Agriculture, fisheries, and plantations

Holder: Indonesian Legal Entity

Used as a Collateral: Applicable.

4. Right to Use (Hak Pakai/ “HP”)

Time Period: Maximum 25 years and can be extended for maximum 20 years

Used as a Collateral: Not applicable, unless otherwise specified in the lease agreement (using Fidusia security instrument).

Property Ownership

Property Ownership

As mentioned above, property or building ownership is less regulated. This has led to (i) no exact name given to the legal title as the proof of ownership for a property; or (ii) there is a specific property that has a legal title but not classified as a Property Ownership, but Land Ownership (e.g. Strata Title/ Sertifikat Hak Milik Atas Satuan Rumah Susun/ “SHMSRS”).

In practice, a person (private or legal entity) may be acknowledged as the owner of a property if they have an Building License Permit (Izin Mendirikan Bangunan/ “IMB”). Theoretically, a permit is different from a title of ownership, however, an IMB which was originally intended to be a building construction permit is used also as a document to prove the ownership of a property. This does not apply to a property that has legal title of Strata Title/ SHMSRS.

Negative List of Investment (Daftar Negatif Investasi/ “DNI”) is a tool for the Indonesian government to control direct investment in Indonesia whether it was made by foreign or local investors. Currently, it is regulated by Presidential Regulation 44 of 2016.

The Indonesia government has tried to make the current DNI to be easily understood by investors, however, in order to understand it clearly, you need some accumulated experience from research into the relevant government institution and related regulation.

The following are the 3 keys to understanding the DNI based on our experience.

1. Know Your Business

You need to know exactly the business activity that you are planning to do in Indonesia. This will be the easiest part if your planned business in Indonesia will be the same with your existing business.

However, the problem might arise when you do not understand Indonesian language to help articulate your plan clearly. Fortunately, there are many Indonesian and government official in Indonesia who may speak English fluently.

The other major problem left is if you do not want to be honest with your business activity in Indonesia whether because (i) internationally your product or service is prohibited, (ii) the business is close or open conditionally with some restrictions but still you want to do the business and do not want to have any restriction, or (iii) your type of business does not exist in Indonesia.

Strictly, no solution might be provided for problem one, some solutions might be provided for number two (with risk) while innovative approaches are required to find solutions for the number three.

2. Match Your Business Activity with KBLI Code

After understanding your business activity, you can easily search for a code that matches with your business activity classification in the Indonesian Business Classification Code (Klasifikasi Baku Lapangan Usaha Indonesia/ “KBLI”). The KBLI is written in Indonesia, however, it has similar code and classification with International Standard Industrial Classification of All Economic Activities (“ISIC”) issued by United Nation Statistic Division that you can relate with.

Understanding KBLI will not just help you to see whether your business is open, conditionally open, or restricted, but it will also help you to describe completely your business activity in your company article of association when you meet a notary for your company registration.

3. Match KBLI Code with DNI

DNI only consists of business activity lists that are: (i) closed, (ii) reserved for SME, and (iii) conditionally open. Therefore, if there is no match between the KBLI Code and the DNI, then in principle your business is open 100% for foreign investment (and also local investment).

The list of business activities that are conditionally open still gives room for the foreign investor to do the investment with some requirements (condition) that need to be followed by the investor. The requirements include maximum foreign share ownership, technical ministry recommendation/permit, etc.

Kindly note that there are some business activities that though they are not stated in the DNI, they may still have some requirements that the investor who intends to engage in the business needs to follow, such as investing in the banking industry.

Still Confused? Get Confirmation from BKPM

Even an experienced person may still get confused with the DNI as it’s a part of investment law that is complexly regulated which may be changed over time. If you still need clarification, it is strongly advised to get confirmation from Investment Coordinating Board (Badan Koordinasi Penanaman Modal/ “BKPM”).

As mentioned earlier, there are so many government officials who speak English including officials in BKPM. In addition, BKPM also accepts documents written in English for its correspondence or application purpose. Furthermore, BKPM also has a specialized foreign desk that speaks foreign languages including Mandarin, Japanese, and Arabic.

As said by Vanessa Redgrave “Ask the right questions if you’re going to find the right answers.” It is important for you to do all the three above as your preliminary research in order to ask the right questions and obtain the right answer from the BKPM official.

There are several ways for foreign investor to setup business in Indonesia. If the investor wishes to sell its product or service without the need to have their own presence in Indonesia they may choose to appoint an Agent or Distributor. However, should they like to have own presence in Indonesia they may choose to register business entity such as Representative Office (RO) and/or Foreign Investment Company (FDI Co./ PT. PMA).

Following are the brief reference for each ways as mentioned above.

Appointment of Agent or Distributor

Foreign company may enter to an agency or distributorship appointment agreement with Indonesian company to have its product or service marketed and/or distributed in Indonesia. The said appointment need to be registered to the Ministry of Trade subject to its Regulation No. 11 of 2006 (MoT 11 of 2006). Failure to comply with such stipulation may result in the business license of the local counterpart being revoked.

The said regulation stipulates that the appointment can be in the form of general appointment (agent/ distributor) or exclusive appointment (sole agent/ sole distributor). further it also stipulates that the appointment may be made by the followings.

Principal;

Supplier (based on Principal approval);

PT. PMA (in wholesaler/ distributor activity); or

Trade RO (Kantor Perwakilan Perusahaan Perdagangan Asing/ KP3A).

The said regulation also stipulates that the PT PMA in wholesaler/ distributor activity must appoint local company as its agent or distributor to do its activity in Indonesia.

Having the stipulation above, a PT. PMA in wholesaler/ distributor is required to have distributorship appointment by its principal (e.g. parent company or group company) in order to distribute its product in Indonesia. This is required due to PT. PMA as an entity registered under Indonesian Company Law which is also categorized as local company. However as a PT PMA, it need to appoint other Local Entity as its agent or distributor. In practice the second appointment is made by a PT. PMA to a 100% Local Company.

Kindly note that the said appointment agreement above is required to be legalized by the notary. By the notary of the principal’s home country if it’s made made outside Indonesia or by Indonesian Notary if the agreement is made in Indonesia.

Registration of Representative Office (RO)

The regulation of RO is similar with PT. PMA, it’s complexly regulated by many regulation and have many authority in charge depends on type of the RO. However in brief the RO is categorized based on conditions below.

Marketing RO

Income Generation RO

The first RO is only authorized to do market research, acting as liaison between local and its principal, and/or organizing principal affiliation in Indonesia. It is prohibited to generate any income in Indonesia. ROs that fall into this category are Trade Representative Office (Kantor Perwakilan Perusahaan Perdagangan Asing/ KP3A), Foreign Representative Office (Kantor Perwakilan Perusahaan Asing/ KPPA), Foreign Airline Representative Office (Kantor Perwakilan Penerbangan Asing), etc.

The second RO may generate income under some condition. Foreign Public Work Representative Office/ Construction Representative Office (Kantor Perwakilan Badan Usaha Jasa Konstruksi Asing/ BUJKA) is the only RO that fall into this category. It may generate income under the condition that it has joint operation with local company when delivering its service.

As mentioned above, the regulation and the authority in charge is different for each RO types. However after obtaining the delegation, now Indonesia Investment Coordinating Board (Badan Koordinasi Penanaman Modal/ BKPM) have the authority to issue the license for KP3A, KPPA, and BUJKA. Those three are the most types of RO applied registered in Indonesia.

Registration of Foreign Investment Company (PT. PMA)

In brief PT. PMA is the main way to do business in Indonesia. It may do marketing and deliver service directly to its customer (allowed to generate income). The entity is registered as a legal entity therefore it separates and distinct liability of the company from its owners (i.e. foreign investor).

The company is required to have a minimum two shareholders and minimum total investment of IDR 10 Billlion. The maximum foreign ownership is regulated in Presidential Regulation 44 of 2016 (Negative List of Investment).

A Penanaman Modal Asing (“PMA”)/ Foreign Direct Investment (“FDI”) in Indonesia is regulated under Law 25 of 2007 (Undang Undang Penanaman Modal/ Direct Investment Law), the law applies to FDI and also Local Direct Investment.

In brief, the law stipulates that FDI is any investment made by a foreign party (private person/ legal entity/country) directly with a legal entity in Indonesia in form of a shared ownership, whether the ownership is partly or wholly owned by a foreign party. Kindly note that the Law 25 of 2007 is not applicable to share ownership through the capital market.

Negative List of Investment/DNI

Law 25 of 2007 stipulates that the government may regulate open business activities and restrict direct investment made by citizens or foreigners through Presidential Regulations.

The latest ruling (when this article is made) is Presidential Regulation 44 of 2016 (Daftar Bidang Usaha Yang Tertutup dan Bidang Usaha Yang Terbuka Dengan Persyaratan di Bidang Penanaman Modal/ List of Business Fields That Are Closed To Investment and Business Fields That Are Conditionally Open For Investment) which in practice are usually called Negative List of Investment (Daftar Negatif Investasi/ “DNI”).

The key to understanding DNI is to understand business classification in Indonesian Business Industry Classification Code (Klasifikasi Baku Lapangan Usaha Indonesia/ “KBLI”). Once we understand a business activity that we are interested in, then we may check whether the particular activity is open, close, or conditionally open.

An open business activity is indicated by the absence of the code in the DNI, while the code for a closed business activity and conditionally open business activity will appear in the DNI.

Open means that the business activity is 100% open and available for investment (local/FDI), while close will be the opposite. As for conditionally open, it may be classified to restricted for foreign investment (partially ​or fully​ restricted) or requires further arrangements (e.g. required to cooperate with Small Medium Scale Companies).

However, please be advised that there are some business activities that need to be confirmed by the authority in charge as there are some regulations from the technical ministry in charge that may not have been harmonized with the DNI.

By law, the authority in charge of each business activity is the technical ministry. For instance, distributor activity is monitored by Ministry of Trade, mining activity is monitored by Ministry of Energy and Natural Resources, etc.

However, in relation to direct investment, the technical ministry can delegate some of their authority (e.g. issuing licenses/permits) to BKPM. Having the delegated authority, BKPM has an authority over most direct investment​ activities in Indonesia.

We can’t ​say “everything” because some business activities like banking and finance are still monitored and regulated by Financial Service Authority/ Otoritas Jasa Keuangan/ “OJK”).

BasicRequirements

The FDI must require the services of a notary to form a PT. Company in order to operate in Indonesia. The company’s business activity must be in line with the DNI guidelines as mentioned above.

As a PT. Company, it needs at least two persons (private individual/legal entity) as the company shareholders. The minimum shares owned by the minority shareholder is IDR 10 Million. In practice, the company is called Perusahaan Terbatas Penamanan Modal Asing (PT. PMA).

The minimum total investment value per business activity for a FDI must be more than IDR 10 Billion (in practice, adding another IDR 1 Million is enough). The investment can be financed through equity and loan. Kindly note that BKPM may request a higher investment based on the business activity applied.

The total investment must fully reflect in the Authorized Capital stated in the Article of Incorporation of the company. The Paid Up and Issued Capital (Cash deposit) are at least 25% from the Authorized Capital. Subject to the new Ministry of Law and Human Rights (“MLHR”) regulation, the deposit needs to be made within three months after the MLHR approval’s issuance date.

Further, the company is required to have a minimum of one person as a Director and one person as Commissioner. Kindly note that a legal entity is not allowed to hold such position in Indonesia.

As a business entity, a PT. PMA is required to have at least the following basic legal documents/licenses/permits to operate.

Principal License;

Article of Incorporation/Association (“AoI”/”AoA”);

Ministry of Law and Human Rights Approval for the AoI/AoA;

Certificate of Domicile;

Certificate of Tax Registration;

Certificate of Company Registration; and

Business License.

Kindly note that the list above may be increased subject to the type of business activity engaged by the company.

Perseroan Terbatas/ “PT” is the common type of company registered in Indonesia for doing business

There are many types of company existing in Indonesia like; Perseroan​ Terbatas (PT), Koperasi, Firma (Fa), Commanditaire Vennoostchaap (CV), etc. The first mentioned type, PT Company, is a common type of company registered in Indonesia for doing business.

PT Company is suitable for small, medium-scale business, and large-scale business. Also, this is the only type of company allowed to be registered for the purpose of Foreign Direct Investment/ FDI.

The principles of a PT Company are similar to the term of “Corporation/Limited Liability Company” in the United States. It has the following characteristics: (i) It’s a legal entity; (ii) its ownership is based on shares owned, and (iii) it has a limited liability characteristic (this is a very important factor because it separates the liability of the company from its owners);

PT Company is regulated by the Indonesian Company Law No. 40 of 2007. It is a form of business based on an agreement between the founders. Having said that, the founders of a PT company must be at least two persons (individual and/or legal entity).

Initially, the founders must become also the shareholders, however, they can later sell their share ownership to other persons as long as the shareholders in the company consist of at least two persons. If there is only one shareholder, then the PT Company may lose its limited liability status.

Procedure

In principle, registering a PT Company for small, medium-scale business and large-scale business will have similar procedures. The only distinction is registering PT for the purpose of FDI. A notary’s assistance is required in registering a PT Company because a notary is a public official that is authorized to create a deed of company incorporation.

The following are the procedures.

Preparation

The founders are required to enter into a company incorporation agreement. The Ministry and Human Rights/ MLHR as the government ministry in charge of PT Company registration has provided a standard format for the deed of company incorporation agreement. Some items in it are mandatory to be followed, some can be adjusted to suit the needs of the founders and some need to be completed by them. We can consult the notary on those matters.

The following are the most common items that need to be completed by the founders.

Name;

Capital;

Domicile;

Business Activity;

Board of Director;

Board of Commissioners​;

Fiscal year; and

Shares ownership.

Registration

Once the founder provides the above information, then the notary will search the company name in MLHR online system. If it’s available, then the notary will reserve it for the founder which will be valid for 60 days.

Next, the notary will draw up the deed using the information given. Since the deed will contain many legal jargons, it is advised to consult the notary for every unclear items stated in it to avoid any issue that might be raised in the future.

If all of the founders agree with the deed, then they are required to sign it in the presence of the notary. Thereafter, the notary will finalize the deed and submit it through MLHR’s online system for their approval.

Kindly note that for the FDI, the founders are advised to apply for a principal license from the Indonesia Investment Coordination Board (Badan Koordinasi Penanaman Modal/BKPM) before they sign the deed.

The PT Company is fully registered as a legal entity and it will have limited liability status after the MLHR issues the approval. The approval will be sent by the MLHR to the notary in electronic form. Upon receiving the approval, the notary will print and give it to the founders along with the final deed.

Post Registration

After the company is registered as a legal entity, the shareholders are required to hold the first general meeting of shareholders to approve all actions made by the founder before the PT Company is registered.

At this stage, the director of the company will assume the leadership role of the company. From administration law perspective, the director is required to apply for basic license and permit as follows.

Certificate of Domicile;

Tax Payer ID;

Business License; and

Certificate of Company Registration.

Kindly note that the above items are only basic requirements for the company to legally operate and run its business activity. The list will go up based on the type of PT Company (Local/FDI), business activity, location, etc.

In Indonesia a notary is a private person who’s appointed by the government as a public official authorized to create an authentic deed.

Notary in one of the oldest legal profession in Indonesia other than the judge, state attorney, and lawyer. In this country, a notary is a private person who’s appointed by the government (i.e. Ministry of Law and Human Right/MLHR) as a public official authorized to create an authentic deed.

As a public official, a notary must be independent of the client’s interest in performing his/her role. Their main role includes creating a deed, notarizing documents, and consultancy.

Deed

Creating an authentic deed is the most common role of a notary in Indonesia. A deed is made based on the request of the client which could either be because (i) the deed is obligatory to be made by the law; (ii) or voluntary​ request by the client even though the legal document is not required to be made in the form of an authentic deed.

Examples of the first type are: Company’s Article of Incorporation Deed; Fiduciary Securities Deed; and Will Deed (Testament).

The notable difference between those types are; if the said deed is mandatory to be filed to some government institutions for registration and/or obtaining approval, then it will be categorized as the first type.

For instance, the Indonesian Company Law (Law 40 of 2007) regulates that a Company’s Article of Incorporation Deed is required to be filed to the MLHR for obtaining approval, while Loan Agreement Deed does not have that kind of requirement.

In principle, mandatory filing is required to be performed by the party. However, for some applications, the government hands over the technical matters to a notary.

Having said that, in practice, a founder of a limited liability company (perseroan terbatas) does not need to come to the MLHR to apply for an approval for his/her company’s incorporation, the application will be performed by the notary through MLHR’s online system that could only be accessed by the notary.

(Not Notary Deed)

Even though the Indonesian Notary Law (Law 2 of 2014) gives a notary the authority to create a deed in relation to land and auction, however, in reality, those documents could only be made by other public officials.

Subject to land regulation, deed related to a land is the authority of a Land Title Register Official (Pejabat Pembuat Akta Tanah/PPAT). This official is appointed and supervised by the National Land Agency.

While subject to auction regulation, deed related to an auction is the authority of a Second Tier Auction Official (Pejabat Lelang Kelas II). This official is appointed and supervised by the Ministry of Finance.

Although these professions mentioned above are different, however, they can be carried out by the same person. This is the very reason why we see different name plates for the same person (Notaris, Pejabat Pembuat Akta Tanah, and Pejabat Lelang Kelas II).

Notarization

This is the most misunderstood role of a notary. Many people think that every non-authentic document which has a notary stamp on it will simply be regarded in Indonesia as “legalisir” (legalized), while in fact, as described below- a notary has several roles apart from stamping non-authentic documents.

Authorize signatures and specify the date of the letter under the hand by registering in a notary record (referred as Legalisir/ legalization);

Record a non-authentic document letter in a notary record (referred as waarmerking/ Registration);

Make copies of the original non-authentic document (referred as copie collationnee); and

To certify that a photocopy matches the original letter.

Legalization is requested if the client would like to have the notary witness and confirm the signing of some non-authentic documents. Consequently, the document is not yet finalized when the client appears before a notary. Also, the other documents are required to be prepared before they are delivered to a notary to be administered.

Since in Indonesia all of the services above are commonly called “legalisir”, it is strongly advised to have confirmation from the person/organization that requested the “legalisir” in order to have a clear understanding of which notarization service needs to be performed, especially for the purpose of using an Indonesian document outside Indonesia

Consultancy

In principle, since a notary is a legal practitioner, he/she may also offer consultancy services to clients. The consultation will contain legal matters related to the creation of a particular deed requested by the client.

For instance, when a client requests for the incorporation of a company, a notary may give consultation regarding the legal terms contained in the deed to suit the client’s need. Further, they may also inform the client of the type of licenses required by the company to perform its business activity since this is quite related to the deed made (in relation to the stated company’s business activity).